Seven Chapter 7 Bankruptcy Mistakes to Avoid

When filing bankruptcy, certain mistakes may jeopardize your ability to eliminate all or most of your debt. In some cases, these mistakes may even deprive you of the chance to receive any discharge at all. An experienced bankruptcy attorney can help protect your interests throughout the bankruptcy process and help you avoid these seven common Chapter 7 bankruptcy mistakes:

1. Listing all of your creditors. When you prepare your bankruptcy petition, you are required to list your creditors. If you forget to list a creditor in your bankruptcy petition, this creditor will not be included in your discharge and will be free to use whatever collection measures are available to collect the debt from you after your bankruptcy is concluded.

2. Making preferential debt payments prior to filing bankruptcy. It’s usual for debtors to prefer to pay off some creditors before others. For example, you may prefer to make payments on certain unsecured debts before paying on other secured debt. However, secured debts have priority over unsecured debt, and any preferential payments made within 12 months prior to filing bankruptcy can be ordered returned to your bankruptcy trustee. Your trustee will then distribute those funds appropriately amongst your creditors.

3. Transferring assets prior to filing bankruptcy. Like with preferential payments, any transfer of assets the trustee believes you made too close to filing bankruptcy, or transfers made in an attempt to hide assets from creditors, may be ordered returned to your bankruptcy estate for distribution to your creditors. It is possible to transfer assets for fair market value, but it must be done with care so as not to raise the suspicion of the court. It is wise to consult with an experienced bankruptcy attorney before making any such transference.

4. Modifying your mortgage prior to the approval or denial of your bankruptcy petition. If you apply to modify your mortgage when you are planning to file bankruptcy, your application to modify may be denied. This is true even though the bank knows that you will have more money available to make your mortgage payments after bankruptcy. If you need a modification, discuss this decision with a skilled bankruptcy attorney before proceeding.

5. Filing bankruptcy with a whole-life insurance policy for which the beneficiary is someone other than your spouse or children. Whole-life policies with large cash values and for whom the beneficiary is someone other than your spouse or children will not be exempt from liquidation during bankruptcy, unless it fits into your wallet exemption. If this situation applies to you, be sure to alert your bankruptcy attorney prior to filing bankruptcy.

6. Losing your tax refund. If you filed your tax return late in the prior year, or early in the year in which you file bankruptcy, you may lose any unspent tax refund in bankruptcy. If you are expecting a large tax return (more than $1000 for an individual or $2000 for a couple), it would be wise to consult a skilled bankruptcy attorney about whether it would be better to delay your bankruptcy until after you have received and spent your tax return.

7. Waiting too long to file bankruptcy. Overall, the biggest mistake debtors make is waiting too long to file bankruptcy. There is no need to wait until creditors have received judgments against you and your wages are being garnished, your automobile is being repossessed and your home is foreclosed upon. This situation will only exacerbate your financial woes before, during and after bankruptcy.

As soon as you file bankruptcy, an automatic stay of all creditor activity will immediately go into effect. This stay will require all creditors to cease wage garnishments and any other efforts to collect on your debts. It will also give you the opportunity to “right your ship” without harassment from creditors and enable you to avoid further financial ruin.